Marilyn Gilroy

The default rate on student loans is rising, and the numbers have set off debates about the cost of higher education and lending practices at some institutions. One advocacy group,StudentLoanJustice.Org, says that the problem is a result of “predatory, uncompetitive laws” that do not give students standard consumer protections available in other loan markets.

“The student loan industry is the most profitable, uncompetitive, oppressive and predatory kind of debt of any in the nation,” said Alan Collinge, founder of StudentLoanJustice.Org.

While not everyone agrees with that assessment, the default rates have gained considerable national attention as a result of a report last summer by the U.S. Government Accountability Office (GAO) saying that several forprofit schools “encouraged fraud and engaged in deceptive marketing practices.”

Increasing Default RatesAlthough default rates across all sectors of higher education have climbed to 7 percent, the biggest rise has occurred at for-profit schools, which now stand at more than 11 percent. The 2010 national cohort rates are based on 2008 figures because the Department of Education (ED) measures those who default in the first two years of repayment. Compared to 2007 data, figures showed an increase from 5.9 percent to 6 percent for public institutions, from 3.7 percent to 4 percent for private institutions, and from 11 percent to 11.6 percent for for-profit schools.

Although officials expected some increase because of the recession and job losses, there is particular concern over the for-profit sector, which is a popular higher education destination for many minorities. These data confirm “what we already know: that many students are struggling to pay back their student loans during very difficult economic times,” said U.S.Secretary of Education Arne Duncan in releasing the figures. “The data also tell us that students attending for-profit schools are the most likely to default,” he added. “While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not. Far too many for-profit schools are saddling students with debt they cannot afford inexchange for degrees and certificates they cannot use. This is a disservice to students and taxpayers and undermines the valuable work being done by the for-profit education industry as a whole.”

As part of his latest call to action, Alan Collinge has written a book, The Student Loan Scam, which covers the history of student loans and the rise of Sallie Mae and other powerful student loan companies.

The ED reports that in award year 2008-09, students at for-profit schools represented 26 percent of the borrower population and 43 percent of all defaulters. The median federal student loan debt carried by students earning associate degrees at for-profit institutions was $14,000.

The upward trend in default rates has been fueled by rising college enrollment, tuition increases and economic circumstances that have forced students and their parents to borrow more heavily. The federal government now sends $24 billion in student aid programs to the nation’s colleges and universities. For-profits enroll approximately 10 percent of studentsin postsecondary higher education, or 1.8 million, but those students receive almost 25 percent of Pell Grants and Stafford Loans provided by the government.

Who Is Likely to Default?

Researchers at the College Board Advocacy and Policy Center say highdebt levels are a concern, but not necessarily an indicator of repaymentproblems.

“We know that failure to complete a degree or certificate program is the most consistent predictor of student loan default,” said Sandy Baum and Patricia Steele in their 2010 Trends in Higher Education Report titled Who Borrows Most?

The report examines characteristics of undergraduate students whose debt levels are greatest. The authors say the problem is not that all students are borrowing too much but that some groups of borrowers might be at risk of serious financial difficulty. Furthermore, many young people have a limited understanding of the effects of the obligations they are undertakingand cannot accurately predict future earnings.

The statistics on those who do graduate reveals differences in debt level, type of loans and vulnerability to risk across the various higher education sectors. The study found that of the 66 percent of bachelor’s degree recipients who graduated with debt, 25 percent borrowed $35,500 or more. However, even students with lower debt might struggle because ofweak earnings. For example, the 10 percent of associate degree recipients who graduated with more than $20,400 in debt are as vulnerable as the bachelor’s degree recipients with twice as much debt because the earning potential of the two-year degree is generally lower.

The report found that high debt is most common among students who graduated from for-profit institutions, in which more than half of 2007-08 bachelor’s degree recipients had $30,500 or more in debt. More significantly, nonfederal borrowing is most widespread in this sector. Among for-profit bachelor’s degree recipients, 65 percent of borrowers had anaverage of $11,300 in nonfederal debt – in addition to their federal student loans.

“Students using nonfederal loans to pay for college are of particular concern because private student loans generally have higher interest rates and do not come with the same repayment protection as federal student loans,” said Baum, a professor emerita at Skidmore College. “These are the students who are more likely to face repayment difficulties.”

Experts at the Project on Student Debt have reached similar conclusions, cautioning that the difference in the kind of debt students graduate with matters and that private loans put students “at the mercy of the lender.”

Who Borrows Most? also found that debt levels vary among racial/ethnic groups. Borrowing is more prevalent among Black bachelor’s degree recipients, with 27 percent borrowing $30,500 or more, compared to 16 percent of Whites, 14 percent of Hispanics/Latinos and 9 percent of Asian-Americans.

Challenging the Student Loan Industry

The most recent statistics on student loans are no surprise to Collinge. He founded StudentLoanJustice.Org in 2005 as a “grass-roots organization” to help borrowers who are adversely affected by predatory loan practices, which he says are “systemic” and not limited to the for-profit sector.

“I have been calling attention to these activities for years, so it was long, long overdue,” he said. “However, the for-profits are not alone in engaging in activities that ultimately cause massive harm. The other schools are nearly as bad.”

Collinge’s fight with the student loan industry was born out of his own struggle to pay back $38,000 in student loans that he borrowed when he studied at the University of Southern California. Over the years, he racked up interest, fees and penalties that raised his debt to approximately$100,000. As part of the Catch-22 of student loans, Collinge found it harderto get employment when companies began requiring security checks on applicants.

His situation is similar to that of many of the 8,000 members of StudentLoanJustice.Org. The organization’s website and its Facebook page contain testimonials from former students who entered college hoping to better their lives and find good jobs. When these individuals could not get jobs in their fields, such as education, business and the hospitality industry, they soon found themselves with huge financial penalties when they could not meet their student loan payments.

“People who default on student loans are typically decent students who, for one reason or another, were not able to capitalize on their education,” says Collinge. “Most agree that they are responsible to pay back what they borrowed, but they cannot afford to pay back the wildly increased amounts that federal law has allowed to be imposed on them.”

The problem, he says, is that laws currently call for massive penalties to be attached to student loan debt. Laws also take away bankruptcy protection and do not allow refinancing of the debt. In addition, student borrowers are subject to wage and tax garnishment as well as possible termination of employment.

For the last five years, StudentLoanJustice.Org has lobbied for legislation that would give standard consumer protection laws to student loans. Members have taken their cause to the media and legislators and even completed a 23,000-mile bus tour across the country to visit members of the House and Senate in their home districts. Collinge would like to see theDepartment of Education to get tougher with schools and lenders.

Debt Levels for UndergraduatesThis chart reports both the distribution of student debt levels among all bachelor’s degree recipients and the distribution when only those who borrowed are included. Ten percent of bachelor’s degree recipients graduated with $39,300 or more in education debt, and a quarter graduated with at least $24,600. Among the two-thirds with debt, 25 percent borrowed $30,500 or more. While debt levels are lower for associate degree and certificateearners, their expected earnings are also much lower, so it is reasonable to define high debt separately for each group. The 10 percent of associate degree recipients who graduated with over $20,400 in debt may be at least as vulnerable as the bachelor’s degree recipients with twice as much debt.

“Returning bankruptcy and other standard consumer protections will at least force the Department [of Education] to have some skin in the game so that they may actually take their oversight role seriously,” he said.

In response to the growth of enrollment, debt load and default rates at for-profit schools, the Obama administration is negotiating with the higher education community to develop a set of proposals that strengthen the integrity of the federal student aid programs. Some of the administration’s proposed regulations are aimed at protecting students from misleadingand overly aggressive recruiting practices, providing consumers with better information about the effectiveness of career college programs and ensuring that only eligible students and programs receive aid.

One of the most significant proposals requires for-profit institutions to better prepare students for “gainful employment” or risk losing access to federal student aid. Colleges would have to have a repayment rate of at least 45 percent to continue to be eligible for student aid programs. Federal standards also would include new formulas to measure debt-income levels to make sure that graduates are not taking on too much debt.

“Gainful employment is actually a pretty well designed feedback and control mechanism,” said Collinge. “But as long as standard consumer protections are absent from student loans, causing the Department of Education to profit from defaulted loans, neither this nor any other rule attempting to hold the colleges accountable will have any effect.”

As part of his latest call to action, Collinge has written a book, The Student Loan Scam, which covers the history of student loans and the rise of Sallie Mae and other powerful student loan companies. He continues to press the case for regulation and believes that the time for reformis long overdue.

“This problem is simply too menacing and damaging to the public interest to go unattended,” he said, adding that student loan debt now surpasses credit card debt in the U.S.

One step toward change was taken last year when President Obama signed the Health Care and Education Reconciliation Act, which contained provisions allowing students to borrow money directly from the government instead of going through private banks for government guaranteed loans. But while that might help make the process go more smoothly, it didnot change the fee or penalties associated with the loans.

Sandy Baum, part of a team of researchers, policy experts and higher education officials examining student aid policies, says the current system is neither transparent nor predictable, especially for students from lowincome backgrounds who often have no family resources for college. “Student loans can contribute significantly to providing educational opportunities,” said Baum. “However, it is vital that we educate students and parents about loans. We also need to design policies to protect students as much as possible from unmanageable debt.”